The Pomp Podcast - #1002 Ben Miller On How To Invest In Real Estate During The Bear Market

Episode Date: June 13, 2022

Benjamin Miller Is The Co-Founder & CEO of Fundrise. In this conversation, we discuss the macro environment, The Fed, looming recession, stagflation, investing in real estate in this environment, and how Fundrise helps customers invest in real estate. ======================= Brave Wallet is the first secure crypto wallet built natively in a web3 crypto browser. No extension required. Store, manage, and grow your portfolio, get NFT & multi-chain support, and more.    Download the Brave privacy browser at brave.com/Pomp, and click the wallet icon to get started. ======================= Today’s episode is sponsored by Abra. Based in California and backed by top VC firms, Abra is an all-in-one simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin.  Join nearly 2 million users by downloading Abra from the Google Play or Apple App store. If you download the app today, you will get $15 in free crypto once you fund your account.  You came, you invested — now conquer. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Ben Miller is the founder and CEO of Fundrise. In this conversation, we talked about the real estate market, the Federal Reserve, a possible recession on the horizon, interest rates, how investors can start getting educated about the asset class, and much more. I really enjoyed this conversation with Ben, and I hope you guys enjoy it as well. Before we get into this episode, I first want to talk about our sponsors. This episode is brought to you by BlockFi. BlockFi provides financial products for crypto investors. Those products include

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Today's episode is sponsored by Abra. They're based in California and they're backed by top VC firms. Abra is an all-in-one, simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral, and earn interest with up to 13% APY on stablecoins and 7.15% APY on Bitcoin. You can join nearly 2 million users by downloading Abra from the Google Play or Apple App Store. If you download the app today, you will get $15 in free crypto once you fund your account. You came, you invested, now conquer.

Abra, conquer crypto. Go check it out today. All right, guys. Bang, bang. I've got Ben here with me. Ben, I'm super excited to talk to you. Everyone is asking, what is going on in the real estate market? We had great times. There was interest rates at 0%, and it seemed like everyone and anyone who could borrow was borrowing, and they were plowing it into real estate, residential, commercial. It was good times. Maybe not so much now. How do you guys view the current economic situation with regards to the real estate market? Well, so I think we're going into recession. We can call that today. So the

Fed, everyone on this call probably knows that Fed's been printing money, almost $10 trillion. That's been inflating all assets. And now they're going to try to reverse that. And that sort of unwinding all that free money is collapsing asset prices, especially financial assets, right? Because the Fed, the way they affect the economy is through financial assets. So things that are like stocks or bonds are going to hurt the most. And what's happening is real estate is starting to bifurcate, right? In good times, all assets price the same. In bad times, good assets price well and bad assets price down. So you're starting to see this sort of split in the market between good assets, bad assets, as the Fed raises interest rates, and as the Fed's about to start

wind down their balance sheet, you know, sell off all that $10 trillion or $9 trillion of assets. And so when you think about that, obviously, they're making capital more expensive. There's the looming potential recession, which I tend to agree with you, we're going into some bad times here. What do you see happening to real estate prices? And does that mean that people should be more excited about investing now? Should they wait till there's a bottoming of the market? How do you think about the changing real estate prices and then how investors should be reacting? Well, so real estate's a huge asset class, like $100 trillion or something. Housing, I think, is going to slow down a lot, right? I

think home buying is going to grind to a halt by the end of next year. And all of that competition for homes will basically go away. So if you wanted to buy a home and you had all 100% cash, it'd probably be a great time to do it. So that's not to invest, that's to actually to live. What happens in a recession is condo sales or home sales, like we saw in 2008, went to zero. And people who used to buy homes go and rent homes or rent apartments. So we see that I think rental will do really well, rental housing will do well, but for sale housing is going to really have trouble. And so when you start to think about residential, obviously, most people are not buying that from an investment only standpoint, right? They want a roof to live in. And it's kind

of self-explanatory. But on the investment side, you see rentals on the multifamily side, you've got the retail, you've got corporate, it seems like geography plays a big piece. Like there's a ton of stories, it seems almost every week from somebody writing about the New York kind of commercial real estate, people are moving in, people are moving out, companies want to be there, they don't want to be there. How do you think about geography from an investment standpoint? And really, how do people get up to speed on various geographies if they want to go and learn more? Yeah, I think geography is probably the biggest asset creator in real estate. So I mean, the location, location, location. So now, the growth is in the Sunbelt growth is in the Rocky

Mountain States, the trend from the last 20 years ago was that first it was all about big blue cities, all about San Francisco, all about New York. Now it's in reverse. And if you're in Austin, if you're in Tampa, if you're in Charlotte, that's probably going to be a 10 to 20-year run. And if you can get a hold of some good housing at or below replacement cost, then I think you should see good long-term growth. It's really an inflation play. This decade is all about inflation. Last decade was all about basically risk. If it was a risk on decade, this is now going to be inflation decade. And so housing in high growth geographies, that's where to go. So you all have a massive portfolio via the platform. You've got like 300,000 active

investors from the numbers I recently saw and almost $3 billion in AUM. What are you seeing occurring with these real estate prices given the inflation? Inflation is at a 40-year high. What have you seen over maybe the last 12 months? And then what do you expect to happen even with this decade of inflation over the next coming five years? Yeah. So last year, we saw huge inflation. And the way we see inflation in terms of real estate values is in the rent growth. So rents grew 20, 25% last year in the residential. We own about 20,000 apartments and single family rental homes throughout the Sunbelt. So 20,000 is a pretty decent number to have a sense of what's happening on the ground. So we saw huge rent growth last

year. Rent growth has slowed down now. Now it's closer to 10%, 8% to 10%. That's still triple what it would have been in 2017, 18, 20, normal rent growth is 3% a year. So you're still talking about much higher rates of inflation than you've seen historically. It was 3% for 30 years, and now all of a sudden it's 20%, 10%. And I believe it's going to stay high for the next few years because of the background inflation happening in the market. So we're bullish on real assets, especially housing in the Sunbelt. So when you think about the inflation, there's also Q1, we saw economic contraction annualized at about 1.4%. You know, you don't got to be a genius. Stagflation may be coming, may even be here. How do you think about real estate,

not just with high inflation, but also the contracting economy at the same time? Yeah. So stagflation, we really haven't seen since the 1970s. 1970s, we saw really high stagflation, which was a high inflation rate, low growth, lower negative growth. And if you look at that period, a dollar invested in the stock market in 1970 was worth 70 cents 10 years later. 10 years later, 30% real loss. In a real estate, if you put a dollar into a house, a dollar in real estate, 10 years later, you're at $3. You tripled your money. So what happens in stagflation is that real assets appreciate because they basically grow with inflation and financial assets get squeezed because basically they're getting their margins eaten up by high inflation,

but they're having basically low or no price appreciation because they have low growth. So you see a lot of companies suffer in a stagflation environment. So that's why I think you're seeing a lot of people say real estate is probably one of the best asset classes to be in. And that explains sort of why real assets, not just real estate, but other real assets are the best place to be during a stagflationary environment. And how long, you said that we're heading into a recession. Is this something you think will be like 12 months, 18 months, five years? How do you think about the severity of it and the length of it? Yeah, that part, I think I really don't have a good opinion. I mean, I feel like we both have

a view that the Fed has to push us into a recession to bring down inflation. That's what they're saying they're going to do, that you can read between the lines. They have a lot of pressure to basically get rid of the inflation from a political point of view. Now, how much that has sort of unintended consequences, right? The war in Russia is an inflation tax on America. So we have an inflation tax from Russia. The Fed is going to sell down $92 billion of their balance sheet a month. So that's going to be a trillion dollars of new supply of bonds and mortgage-backed securities in markets. That's going to basically drive down asset prices, right? Because price is just supply and demand. So if you increase supply without increasing demand, the price falls. And

that's what's about to happen in asset markets starting later this month. So it just feels like there's too many, the background context for decision-making is really complicated to such an extent, there's no way the Fed can manage that complexity. And so the question is, do you think they're likely to sort of pull their punches like they did last year, compensate. And I think that they're going to overcompensate. That's more of a psychological prediction. It's just a prediction. So take it for what it's worth. How do you think about the difference between what institutions are doing versus retail investors? Do you see any differences there? It's funny how many parallels there are. I mean, institutions will often say how

sophisticated they are and how much they know more. And then you've spent time with them that you actually don't see very marked difference in behavior. They're just people. Mostly what I see institutions doing, so we're in a class called Build for Rent, single family rental, where you're building communities of homes for rent because people want to buy, people want to live in a house, but they can't afford to buy, so they rent. And that asset class didn't exist three years ago. So we're seeing like tens of billions of dollars flow into that asset class. So a lot of what institutions do that people don't do is they allocate based on formulas. So they'll do something that's formulaic, like put money into a sector because they're underexposed to it.

Sort of whether or not that's a good idea is secondary to sort of their models. And you see people, you know, you might go into something because you think it's a good idea, but you won't go into it because your model tells you to do that. So that's probably one of the biggest differences between like institutions and individuals. And so when you start to look at this, talk to me about the Fundrise platform itself in terms of like, where are you all spending your time looking out over the next 12 to 24 months? And where do you think the opportunity in the real estate market is? I mean, so I think there's two ways you can make money in real estate. I've done both. You can make money by picking a great deal,

where you can make money by riding a big wave. I find deal picking to be a lot less certain, a lot more difficult. And I've done, I mean, I've had good successes both ways, but I feel like if you're going to go sailing, you want the tailwind. And so the big wave in real estate is always demographics, globalization, and technology.

And so right now, if you look at the last 20 years, the biggest technology change was e-commerce. and e-commerce drove industrial real estate as they had more and more logistics, last mile logistics, delivering stuff to your house and that replaced retail. This decade and next decade, I think you're gonna see work from home technology

become the way people work and they'll work at home and residential will replace office. And so I see that technology trend combined was a general migratory pattern of moving to the Sunbelt because you can live wherever you want once you have work from home, which means you can live where it's affordable, where there's good weather. And so you start leaving New York and you move to Florida, you move to Raleigh, Durham. So there's just this 10, 20-year trend that I think is going to drive real estate. And that's

what we're all about. We're all about trying to capture that trend as affordably and as efficiently as we can. And so when you start to think about the average investor and their way to start to get into this, why go through a platform like Fundrise versus just try to find a deal themselves? If that's your passion, if you think you're the best deal picker, more power to you, I think it's definitely riskier. You can make more money. It's way more effort. So it's a little bit of, I think it's more of a personal choice. I don't think there's an objective answer. i i've done real estate i don't do that anymore i mean i've it's just a lot more uh it's a lot simpler i think our costs are lower the risk is lower than trying to do yourself but i you know

one of our biggest investors on our platform maybe the biggest definitely one of top three are real estate people real estate people like to invest in real estate and they understand our real estate and they're like oh these people know what they're doing so we have a lot of real estate investors i actually have a guy i have a guy out of chicago who has all his real estate he's selling it all and just put it on Fundrise. Cause he's like, I've done it and it's not, it's not worth it. You guys, I'm just, it's like, I just talked to him for the first time. He has so much money on our platform and he's this great guy, but like, so it's, it's, it's just as much about preferences as about like performance. And so when you think about, uh, the initial purchase, that's pretty

straightforward. How do you think about when to sell a deal or when to, uh, you know, switch whether through 1031 exchange or something else into other deals? Like, how do you think almost life, like the intra real estate investment strategy? Yeah. So I, I, I always try to stack things up by what's most important and do that first. And so I think the mega trends are most important. So we were actually, we're huge investors in like New York and downtown LA and downtown DC. These were like in 2010, 11, 12, 13, 14, the hottest things were like emerging neighborhoods, Brooklyn and LA arts district. And that's basically where tons of money was made. And then we exited that strategy in 2017. Like we, we, we own almost none of it

now, maybe none. And because basically that mega trend had gotten too pricey, you moved to Brooklyn because it was a lot cheaper than Manhattan. Once it became the same price, it stopped making sense. And so affordability is usually one of the most important things you're looking at a price of something. And you say, you know, this is no longer a lot more affordable than if the Sunbelt became the same price as New York, San Francisco, sell. So that's one of the best things to look at is price, price per pound. Got it. And then when you start to think about the macroeconomic environment, is there anything that you're looking for that would make you change your mind? Is it the Fed reversing course and stopping quantitative tightening and dropping

interest rates? How do you think about like, okay, these are the milestones that if this occurred, I would change my mind. Yeah. I mean, I'm like, this is my third or fourth downturn. I was there in 01, I was there in 08, in 2020, and now this one. And man, a depressing takeaway I have is it's just the Fed decides the future of markets. And so in March, 2020, the world's going to hell, right? There's a pandemic, the stock market falls 44%, and the Fed decides to dump whatever, $5 trillion to the economy. And I said, no way, that can't be enough. And it was, right? It was enough to cause everything to rebound. So I just came away saying, whatever the Fed does is what determines the future. So if the Fed reverses itself, or you see very clear indications they're

about to, that's the bottom. And the question now essentially is, unlike the last 20 years, they're constrained by inflation before they weren't so they could just print into infinity now that they're constrained by inflation it's going to be a lot harder for them to reverse themselves and i and i think that that but that's the thing to watch at this point it's like it doesn't even matter what the numbers say like right last year number stock markets seemed really high didn't matter until the fed reversed themselves once they did markets started to fall when you talk to somebody who is trying to get into real estate investing what do you suggest them to learn Is it just, you have to learn by doing, or are there certain resources or things that

you say, Hey, these are the things I would do if I was just starting out my journey? Yeah, I guess I have three, three things. So I'm a, I'm a huge believer in learn by doing definitely, whether it's put $10 on Fundrise or try to like get involved in real estate to learn, learning by doing is the superior way to learn. That's the best. After that, um, actually I think learning through history is the, is the second best. So reading biographies, looking at like, go read a biography of Blackstone, go read a biography of

Goldman Sachs. One's called The Partnership. I can give you lists of great biographies, but I think history, learning how other people did it is the second best way. And the third is, you can go online, you can look at, funderize tons of content. There's lots of content on the internet to read about, but I would put it in that order. And then once somebody gets started, what do you tell them is like the most important thing when underwriting a deal? Is there one metric that you look at? You know, like this is the first metric I look at every time I look at a deal. For me, it's always basis.

Explain that one. The cost basis. So your price per square foot, your price per unit, your price per house, whatever your price per pound might be. To me, that's the most important thing. Like you can look at interest rates or you can look at like people say levered yield or your cash on cash that basically is your total cost

divided by your income or your income divided by your total cost is essentially your PE, if you will. So in real estate, they call it cap rate, but in stock market, they call it price per earnings. So, but the thing is that like that can change a lot. It can change because of interest rates. It can change for so many reasons,

but how your basis, the price you paid per square foot, if you bought something at half the cost to build a new building, half of replacement cost, over time, you should make money. If you buy something at two times replacement cost, two times the cost of building new real estate, you're not going to make money. So that's, to me, the most important thing. And so simple. And so many institutional investors will, institutional investors are probably the most

guilty of forgetting that because they do a lot of complex Excel spreadsheets. that you can lever their real estate with really cheap money. They can get repo money, all sorts of sophisticated ways to use finance to make money. But if you have a bad basis, it just doesn't work out. Yeah. What is it? The price that you buy something at is going to determine the return that you get

is a timeless investing principle, but often forgotten. Yeah. Yeah. I mean, when you're buying a company, like Buffett says, price is what you pay, value is what you get or something. but it's, I think real estate is usually the value of what you get is based on the price you pay per square foot. It's a building, right? That's why the inflation protection, because to build a new building with labor from this year's labor pool, with this year's steel costs, this year's oil

costs is going to be a lot higher than 2019's labor pool and 2019 steel costs, 2019's oil costs. And so that's why it captures the cost of inflation. You just can't replace that building anywhere near the cost that you paid two, three years ago. Yeah, it's pretty incredible at how simple the analysis can be if you boil it down to that. One of my last questions for you is there's a lot of people in tech, actually, that recently have gotten excited about real estate.

We've seen people from the crypto industry diversifying into real estate. We've seen people in tech diversifying. Uh, and I keep hearing over and over again, like, man, I compete with all these smart tech people all the time. Like, oh, I could go to real estate and the people you're competing with are like easier to compete with. Uh, what's your general reaction to that in terms of like, is it true? Is it not true? Is it just people want to say that? Cause it makes them feel smart about going into real estate. No, it's true. I mean, it's true. I mean, like the, the, the, the top of kid in your class, you know, might've gone into tech or investment banking. They did not go into

real estate. Real estate is a meat and potatoes business. That's why I like, I mean, part of the whole is, I mean, when the institutional world lost trillions in the housing crisis in 2007 and eight, you're like, how do they do that? This is like the simplest asset on the planet. So yeah, I think the part that there's a really good quote here. I don't know if you've heard this quote about tech versus real estate. So in tech, you make a hundred investments, you lose on 99, you make all your money on one. And in real estate, you make a hundred investments, you make all your money on 99 and you lose it all on the last one. So it really just does to come down to discipline.

Yeah. So it's just like the nature of leverage in real estate versus tech is just totally different. and i think that's where um i think what happens is the dunning kruger effect right you know like you start thinking you're good at real estate and you every every real estate mogul who ever lost at all is because they made a lot of money and they doubled down they made a lot of money and doubled down and doubled down you know if you're in new york and miami the history of those sort of like empires built and lost are legendary so that's how really that's why it's sort of like it's really about discipline, not smarts. Yeah. It makes complete sense. If you had to leave everyone with one lesson from all your years in real estate, as we wrap up here, what would be

the one thing that you've learned that you're like, man, if I knew this in the beginning, it would have done me so much better in my real estate career. However much real estate you own, also have some amount of cash sitting somewhere else. because the value of your real estate depends on you being able to hold on to it. And that all depends on how much liquidity you have. And so lots of real estate people end up with no cash and lots of wealth

because they just put it all into the real estate and then lose it all. So just like figure out how to hold some meaningful amount of cash somewhere stashed away that you can have in case of an emergency. That's a great piece of advice. And one that more people, not just in real estate, in all asset classes, you're probably here. Where can we send people

to find you on the internet or find out more about Fundrise? Yeah, it's fundrise.com, F-U-N-D-R-I-S-E.com. And then my Twitter handle is Ben Millerize, Ben Miller I-S-E. So just hit me up. Yeah, I love your crew. I have lots of people at the company who was just excited when I was on last time. So yeah. We're going to blast this out to everyone and make sure that they listened twice. So then everyone inside the company will think you're a genius. Yeah. Not a genius. Hopefully disciplined. Disciplined is the key to real estate though, my friend, which just hearing you talk, I could tell that you've been doing this a long time and, and understand the pitfalls, but also understand, look, you can make money. You just got to understand that one, not

lose the discipline and two, what are you looking for? Right. And your point about the cost basis is the number one metric tells a lot about the way that you look at the asset class. Yeah. No, I follow you on Twitter and it's like, you're right on. I mean, the Fed, what's been happening the last 10 years is the biggest thing in financial history, maybe. And so you have to play, your investments should be playing off of that fact, off the Fed's $10 trillion game, if you will. And so I think real estate, probably the best way to do that. There probably are some other ones I would be worried about things that don't take that into account. I think that that is definitely true. Anyone who hasn't checked out Fundrise, highly suggest you do it. Ben and the team there, again, almost $3 billion in assets under management, about 300,000 investors or so. Pretty simple way for you to start getting some real estate exposure while also learning as you do it. So Ben, thanks so much for coming on. We'll definitely have to do this again in the future. And hopefully next time you and I talk, real estate prices are up and the Fed is chilled out, but I wouldn't bet on it.

No. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered.

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